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Like many other industry observers I’ve heard overblown claims for information technology for decades. However, I’ve also observed that – eventually – reality catches up with vision. Finance and accounting departments are particularly resistant to change, yet because almost no corporations use adding machines or typewriters any more, it’s clear that transformative change can happen. Nonetheless, because users of business computing systems are inundated with “it’s better than ever” promotions by vendors, journalists and industry analysts, may have grown jaded and disbelieving. In the case of ERP systems that help run many organizations, that is too bad because we are finally at the point of a fundamental change in this business-critical software category.

ERP systems themselves have been undergoing transformation, enabled by the growing availability of technologies that can address the shortcomings of established systems and an increasing appetite for multitenant, cloud-based ERP systems. As I noted in my research agenda for the Office of Finance, the demographic shift taking place in the ranks of senior executives and managers – from the baby-boom generation to those who grew up with computer technology – will create demand for more capable software. ERP systems are evolving to deliver a better user experience, greater flexibility and agility, as well as an optimized mobile experience and lower total cost of ownership. The transformation has already started for some vendors and to some degree. The pace of change will increase over the next two years as new releases become available. However, I don’t expect companies to buy a brand-new ERP system just to acquire next-generation features. Our Office of Finance benchmark research finds that on average companies replace their ERP systems only every 6.4 years, mainly because of the cost and difficulty of implementing the software. Moreover, many of these capabilities will be available under maintenance contracts for on-premises systems and incorporated automatically in upgrades of cloud-based systems.

The new generation of ERP systems will be vr_office_of_finance_05_finance_should_take_strategic_roleable to support a more effective approach to managing the functions I call continuous accounting that will benefit finance and accounting departments. By eliminating batch data processing and by supporting analytic as well as transactional operations in a unified system, the next generation of ERP systems will enable companies to provide executives and managers with immediate information, alerts and guidance. It will enable departments to spread workloads more evenly across months and quarters, rather than having to wait until the end of the period. In so doing, many companies will be able to accelerate their close, as I have discussed. Continuous accounting can contribute to providing a strategic focus for the finance organization – a change that organizations will welcome. In our research on finance innovation, nine out of 10 participants said that it’s important or very important for finance departments to take a strategic role in running their company.

In many respects, today’s ERP systems are exactly what people don’t want any more. They are notoriously time-consuming and expensive to set up, maintain and modify. In our ERP research only 21 percent of larger companies said that implementing new capabilities in ERP systems is easy or very easy while one-third characterized it as difficult. For this and other reasons, the current generation of ERP software acts a barrier to innovation and improvement.

To be sure, more than any other type of enterprise software, ERP systems are a challenge because of the complexities of business organizations. This isn’t going to change. I’ve spent decades examining all sorts of businesses from multiple perspectives – from strategic, high-level business models to footnotes in financial statements and the execution of specific manufacturing and financial processes. To the uninitiated, everything about business appears simple until they get into the details. Then, even when you strip out inessential elements, it’s still complicated. ERP is complicated because the underlying business requirements are complicated. For example, in any organization there are competing demands and priorities at work when an ERP system is set up.

Although some aspects of ERP will always be complex and require experienced assistance to design and maintain, techniques for mass customization can make it easier to implement and change, thereby eliminating a significant portion of the cost of ownership. To be sure, software companies have tried to minimize deployment costs. For a couple of decades, ERP vendors have offered packages aimed at specific industries such as aerospace and pharmaceuticals. Those addressing midsize companies, which have tighter budgets than large ones, offer out-of-the-box configurations aimed at even more specific types of business, such as steel service centers, manufacturing job shops or brewers. For more generic businesses, today’s cloud-based ERP systems are one solution to the problem of costly updates and reconfiguration. However, this option still may not be attractive if an organization is in a business that has very specific customization requirements that more generic ERP systems cannot support well (for instance, process-manufacturing industries such as specialty chemicals manufacturing).

One positive development in the ERP category is the increasing attention vendors have been paying to the user experience in the design of screens and workflows. The dull, cluttered and difficult-to-navigate interfaces that have been the norm up to now were the result of inexperience in design and constrained computing resources. The next generation of ERP systems is being designed with decades of experience and far more powerful computing platforms and tools than the current ones. In the 1930s, Raymond Loewy and others revolutionized the design of everyday objects, from soda fountains to locomotives and automobiles so that form and function combined to produce a better product. Today, it’s even more important to apply basic concepts of industrial design and ergonomics to creating user interfaces. This goes beyond making old code bases pretty. Largely because of tablets and mobile computing platforms, people now work with multiple types of interfaces and use a wider range of methods and gestures to interact with their devices. The next generation of ERP software must incorporate these advances and ensure that the screens and their flows are optimized for the device. The emerging generation of finance executives and ERP users won’t put up with the inconveniences and awkwardness that their predecessors reconciled themselves to.

It’s also clear that ERP systems will be faster in the future, as redesigning the software’s underlying data structure and utilizing technology such as in-memory processing will eliminate nearly all batch routines. Faster systems enable shorter cycle times, which promote corporate agility because up-to-date information is available sooner. Another important change that is already under way is the ability to do analytics in real time or near real time on data held in an ERP system. The business intelligence (BI) software category was invented two decades ago to enable companies to get useful information from newly implemented ERP software. While BI addressed this shortcoming, it also added to the cost and complexity of a company’s IT operations.

Another focus of new ERP systems will be collaboration. In-context collaboration provides an important set of capabilities that can improve performance. Rather than following a general broadcast model, social collaboration capabilities in ERP and other business applications understand that individuals belong to multiple groups. For example, people in a company typically have a general role (“I’m in Finance”) and one or more task-specific ones (“I’m the director of financial planning and analysis”). Some relationships are persistent while others begin and end with a project. Issues that arise may be open to all or confined to specific groups, subsets of groups or a private dialogue. Queries or comments may be general, specific or anywhere in between. Some conversations, especially in finance and tax departments, must be tightly controlled. Software that understands the context of the work performed and automates the process of managing the who, what and when of communications will support more effective collaboration, faster completion of tasks, greater situational awareness within the organization and as a result better decision-making. Over the past three years, ERP vendors have been introducing more in-context collaboration capabilities in their software.

Mobile enablement is already an important capability of some ERP systems. However, it’s important that ERP vendors focus on those elements where mobility is important and optimize the user experience for the task and platform. Unlike CRM and sales force automation systems, where sales and service information must be accessible anytime and anywhere, mobility’s importance in ERP depends on who uses it and why. Certain tasks such as data entry are not well suited to mobile devices, while routine reviews and approvals are. These must be simple to configure and deploy as well as use.

vr_erpi_01_implementing_new_capabilities_in_erpMore generally I am convinced that the worst aspect of today’s ERP systems is that they inhibit change in corporations. The lack of adaptability in these systems has infused a “set it and forget it” mindset that inhibits companies from making necessary changes in processes and stifles innovation. The inability to make changes easily to an ERP system inhibits improvements in corporate functions that run on ERP. This is ironic, since one of the factors driving corporations to buy the first ERP systems in the 1990s was their desire to do business process re-engineering, a business strategy of the time. More useful is developing a culture of continuous process improvement, one of the pillars of continuous accounting, in the finance organization. Making ERP more easily configurable by business users supports continuous process improvement efforts.

As the business software market, including ERP, increasingly moves to the cloud, a major challenge facing software vendors is designing their applications for maximum configurability. By this I don’t mean offering the ability to select modules from a menu, but enabling only moderately trained line-of-business users to make granular adjustments to process flow and data structures in a multitenant setting. This lack of flexibility is an important barrier inhibiting adoption of cloud-based ERP. Although user organizations that are more able to adapt to an as-is version of an ERP system are more likely to take the cloud-based option, this covers only some of the potential market. The cloud ERP vendors that offer greater flexibility in allowing individual customers to modify their implementation to suit their specific needs will have a competitive advantage. Multitenant cloud ERP vendors already have had to pay attention to configurability, and on-premises ERP vendors also would benefit from enhancing the configurability of their systems.

Today’s corporations have been willing to put up with the deficiencies in their ERP systems because everyone was in the same boat. That won’t be the case much longer. The cost and complexity of ERP systems has meant that IT departments, not business users, have had the fullest involvement in managing them. This, too, will change. Business users and finance departments in particular will need to be involved in periodic assessments of how well their ERP system supports their responsibilities and objectives. Finance executives in particular should begin this process now by understanding how the application of new technologies can drive fundamental changes in the way they manage their department. Vendors that offer ERP systems that are much easier to configure, use and update, support in-context collaboration and mobility and provide timely, reliable analysis and reporting will survive. Those that excel in these areas will win market share.

Regards,

Robert Kugel

Senior Vice President Research

Follow Me on Twitter @rdkugelVR and

Connect with me on LinkedIn.

Invoicing and billing are mundane business activities that hardly anyone outside of the accounting department cares about, but they are where the back office meets the front office. How well a company handles the process of getting paid by its customers can have an impact on its relationships with them. Like most of the details of business process execution, the impact of substandard invoicing and billing is rarely obvious or even of interest to senior management. That said, like trimming scrap rates or increasing sales pipeline conversion rates by a couple of percentage points, achieving consistent incremental gains in the “little stuff” of business usually translates into greater competitiveness and better financial performance.

Conversely, when invoicing and billing are not properly managed they can diminish the performance of a company in two respects. This is especially important for companies that use a recurring revenue business model. The most obvious is that inaccurate bills annoy customers when they’re overcharged and lead to revenue leakage when they are undercharged. Especially in recurring revenue businesses, invoicing and billing can be complicated. Unless a company utilizes software designed specifically for managing recurring revenue, these complications (such as ongoing changes to the customer’s service and promotional pricing periods) can increase accounting department workloads or constrain the ability of marketing and sales to create offers and subscription plans because of those workload concerns.

The recurring revenue model has grown in popularity with providers of services or products because it establishes a regular, predictable income stream as long as the business retains the customer. There are three basic types of selling and billing structures in recurring revenue business model: a one-time transaction plus a periodic service charge; subscription-based services involving periodic charges; or a contractual relationship that charges periodically for goods and services.

Companies that bill annually for a simple subscription is likely to find that they don’t need dedicated recurring revenue billing software because their ERP system can meet its requirements. On the other hand, companies that bill monthly and have any sort of complexity in how they bill for services should look into using a dedicated application designed to handle more demanding requirements. Our recurring revenue benchmark research finds that complexity is relatively common. Half (52%) of companies that use a recurring revenue business model employ four or more types of billing methods. At least one-third use methods that are time-consuming to handle manually (such as an introductory free or discounted period or one-off charges) or that are usage-based (35% have usage-based charges, and 49% have charges based on hours worked).

Quality of service is a metric that companies use to assess how well they meet the needs and expectations of their customers. Achieving a high quality of service in invoicing and billing is essential for recurring revenue businesses to acquire and retain customers, so it’s necessary to handle interactions smoothly. Software designed specifically to handle invoicing and billing for recurring revenue businesses can help ensure high-quality service because it has a direct impact on customer experience. In our research on recurring revenue, improving customer experience was the second-most often cited objective in using the recurring revenue model (by 68% of participants) after increasing revenue (80%). Having repeated positive interactions can be an important determinant of renewal rates. Renewals in turn are a key driver of profitability for subscription-type business because of the relatively high cost of replacing a lost customer. Moreover, since a company’s costs related to its recurring revenue business are relatively fixed in the short term, almost all the impact of lost revenue drops to the bottom line, depressing profits.

Adding to the challenge posed by multiple types of billing arrangements is that historically execution of the order-to-cash process has been fragmented, with each part of the business doing its own thing and managing its activities. This leads to fragmented data as information is entered manually in multiple systems. When data is entered multiple times, inconsistencies and errors are almost inevitable. Last-minute changes in the contract or a purchase order may not be entered everywhere or at the same time. After a couple of months, customers may add or subtract services, and these changes may not be reflected accurately in every system at the same time. For some types of services, data needed for usage-based billing is created in some physical device (such as counting the number of CPU cores used by each customer per unit of time, the minutes of connection time to a call center or the volume of data processed in a billing period). All these complexities and changes can create billing errors.

A dedicated invoicing and billing system is particularly useful for companies that have usage-based billing, especially if customers are utilizing a physical device. Some systems can be set up to collect usage data automatically from that hardware, ensuring accuracy and eliminating several steps necessary to pull data from the system and re-enter it into the invoicing system. When data from one system is re-entered manually into another, it usually requires checking to ensure that the data in the invoicing system is accurate and complete.

In situations such as these, finance departmentsvr_Recurring_Revenue_06_finance_less_satisfied_with_invoicing wind up bearing the brunt of data fragmentation, a fact that is rarely appreciated by the rest of the company. Since finance professionals can’t take for granted that the billing data is utterly reliable, they have to construct enormous spreadsheets to reconcile information about the customers’ services, pricing, the contract terms, usage and other aspects that are stored in each of the systems. It takes time and experience to work through the reconciliation spreadsheets. The more variations in the services and products offered, the more complicated and time-consuming the reconciliation process becomes. Therefore, it shouldn’t be a surprise that our research reveals that those working in finance and accounting organizations are far less happy with their company’s invoicing process than everyone else: Only 29 percent of them said they are satisfied with it, compared to nearly half (47%) of people working in other parts of the company. One way of dealing with complexities is to put tight controls on what sales people can offer and what product managers can introduce, but this isn’t a good solution. It might save time spent by the accounting department, but it can make the company less competitive. Moreover, it’s unnecessary when capable software is on hand.

vr_Recurring_Revenue_07_dedicated_system_users_are_more_satisfiedDedicated billing systems designed for companies that offer recurring or subscription services make it easier to give finance and accounting departments tools they need to perform their jobs well without diminishing the company’s ability to introduce new products or features quickly and without severely limiting sales teams’ flexibility in negotiating pricing, terms and conditions. These dedicated billing systems provide finance and accounting groups with controlled, accurate and up-to-date billing information so that invoicing becomes easier and more reliable. They can substantially reduce or even eliminate errors, which speeds up collections, and they enable companies to handle customer billing inquiries quickly. Automating the process reduces the need for administrative or operational overhead, thereby cutting costs. This facility probably accounts for the research finding that almost all (86%) of users of dedicated billing systems said they are satisfied or somewhat satisfied with them, more often than those who rely on their ERP system (70%) and far more so than those who use spreadsheets to support their process (50%).

A well-designed and -implemented recurring revenue billing system usually will automate the revenue recognition process to make it completely reliable and easier to audit. Companies that try to manage revenue recognition in desktop spreadsheets almost certainly will find that keeping track of even slightly complex services is difficult and time-consuming. It’s even more difficult in recurring revenue businesses because customers frequently modify or change their contracted services or products. Keeping track of what revenue can be recognized and when is even more difficult to do in a spreadsheet when new users sign on or customers decide to add or drop features,  or respond to a new marketing offer.

Companies that have even moderately complex recurring revenue business models should investigate using dedicated invoicing and billing software. Before investing in such software, though, they should think ahead about how it will be implemented – especially how the system will capture contract data, contract changes and usage data – to be sure of making the most appropriate choice of product.

Regards,

Robert Kugel

Senior Vice President Research

Follow Me on Twitter @rdkugelVR and

Connect with me on LinkedIn.

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